Length of Service / Use of Umbrella Companies

DoctorStrange

A friend of mine has worked for a large, FTSE 100 company for almost two years on a temporary contract. The company have offered an extension but only if an umbrella company is used, presumably to avoid any redundancy rights/protections that "permanent" staff receive.

I've been asked whether this is legal (which I believe it is) and whether there are any options to gain employment rights if using the umbrella (which I think there's not).

However I said I'd look further into it, and was was wondering whether anyone here had any thoughts on how an employment tribunal might view this?

The spirit of the law does seem to be violated by simply using an umbrella company, even if the letter of the law remains in tact. Would an ET be able to apply discretion in such a case or is it simply a matter of fact that "the 'legal employer' changed so there are two periods of employment despite carrying out the same duties for the same team at the same company"?

mcpitman

Is the new contract within IR35 PAYE/Tax regualtions?

Was the old job a PSC? (Personal Service Contract, run as a Ltd Company).

2 years tends to be the time limit for contracting roles, so they may be doing you a favour (employment wise), by pushing this to  new contract through an umbrella.

Grumpy_chap

It does sound legal.

I suspect the need to change from Ltd Co contractor to Umbrella Contractor is linked with the IR35 determination.

Employment rights will accrue with the Umbrella Company, starting from zero whenever that type of employment commences. 
Any rights accrued will be constrained because the UC will work on the basis of NMW plus bonus, so rights only accrue against the NMW element.
Only real opportunity for tax efficiency through UC is pension contributions.

Has the individual enquired whether a permanent staff position could be possible with the end Client?  That may be possible and will mean that full employment rights accrue, pension, annual leave etc.  Might well be a similar take-home pay to the UC option.

Marcon

DoctorStrange said:

A friend of mine has worked for a large, FTSE 100 company for almost two years on a temporary contract. The company have offered an extension but only if an umbrella company is used, presumably to avoid any redundancy rights/protections that "permanent" staff receive.

I've been asked whether this is legal (which I believe it is) and whether there are any options to gain employment rights if using the umbrella (which I think there's not).

However I said I'd look further into it, and was was wondering whether anyone here had any thoughts on how an employment tribunal might view this?

The spirit of the law does seem to be violated by simply using an umbrella company, even if the letter of the law remains in tact. Would an ET be able to apply discretion in such a case or is it simply a matter of fact that "the 'legal employer' changed so there are two periods of employment despite carrying out the same duties for the same team at the same company"?

Not clear from your question whether your friend was actually employed by the company on a short term contract, or whether they operated via their own limited company? If the former, there might be an issue with what is being proposed, but not enough information to be sure.

I wonder why you've been asked when you clearly aren't familiar with this area? Maybe suggest your friend gives ACAS's helpline a call if they are seriously concerned that a FTSE 100 is doing something illegal.

DoctorStrange

This one has nothing to do with IR35 or PSCs which I'm well versed in (well, as much as anyone other than Dave Chaplin can be I guess!)

To clarify, they are employed directly with the client on a temporary / fixed term contract, and on PAYE. They started on a 6 month contract which has now rolled 3 times and they want to continue as is. However, the company don't want to provide another 6 months on FTC; they want to switch to an umbrella and continue that way.  They've offered a small uplift to cover the umbrella costs, so tax/take home pay will be almost identical.

The suspicion is that this is just to avoid the granting of employment protections that would ordinarily accrue to a "temporary" worker after 2 years. By switching to an umbrella, the "legal employer" changes and so the clock resets (along with the other changes noted by Grumpy Chap).

I think that this is technically above board, albeit it does sound completely against the spirit of the rules and seems to be taking advantage of the IR35 situation which "normalised" the use of umbrellas in many firms.

They've been told to either take the umbrella option or the contract ends. I've said that sounds about the gist of it, but they're wondering what an ET might say if they later had a dispute i.e. would an ET "look through" the umbrella situation, or are their hands tied by the contractual status?


The reason I've been asked is that I follow the tax tribunals quite closely on IR35 cases to manage my own risk there, but I've no experience with Employment Tribunals. 

I've provided my advice (which is take it or leave it, but if you take it don't bank on any help from an ET later).

It did get me thinking though and I thought I'd check here to see if those with experience with employment disputes rather than tax disputes has any thoughts on companies forcing umbrellas onto people purely to avoid employment rights being granted.

EDIT

By "look through the umbrella situation" I mean in the same way a tax tribunal looks beyond the legal contract to determine the "hypothetical contract" for IR35 status determinations. 

I'm not sure if employment tribunals have that same power.

DE_612183

If they move to umbrella they are responsible for employers NI, apprentice levy, holiday & sick pay and also pension contributions which would have been part of the FTC.

Are you sure the small uplift covers all this and leaves your fields in the same position as far as overall take home is concerned?

DoctorStrange

DE_612183 said:

If they move to umbrella they are responsible for employers NI, apprentice levy, holiday & sick pay and also pension contributions which would have been part of the FTC.

Are you sure the small uplift covers all this and leaves your fields in the same position as far as overall take home is concerned?

I don't have all those details but there's been no concern raised on that front. They've been told it's financially neutral and they accept that. 

It's just the principal of the employment rights thing that's being questioned, as they've been trying to go permanent and thought it happens automatically after 2 years (which I know isn't actually the case but let's not get into that!)

Marcon

DoctorStrange said:

This one has nothing to do with IR35 or PSCs which I'm well versed in (well, as much as anyone other than Dave Chaplin can be I guess!)

To clarify, they are employed directly with the client on a temporary / fixed term contract, and on PAYE. They started on a 6 month contract which has now rolled 3 times and they want to continue as is. However, the company don't want to provide another 6 months on FTC; they want to switch to an umbrella and continue that way.  They've offered a small uplift to cover the umbrella costs, so tax/take home pay will be almost identical.

The suspicion is that this is just to avoid the granting of employment protections that would ordinarily accrue to a "temporary" worker after 2 years. By switching to an umbrella, the "legal employer" changes and so the clock resets (along with the other changes noted by Grumpy Chap).

I think that this is technically above board, albeit it does sound completely against the spirit of the rules and seems to be taking advantage of the IR35 situation which "normalised" the use of umbrellas in many firms.

They've been told to either take the umbrella option or the contract ends. I've said that sounds about the gist of it, but they're wondering what an ET might say if they later had a dispute i.e. would an ET "look through" the umbrella situation, or are their hands tied by the contractual status?

If this is a 6 month contract and has been rolled forward 3 times, then presumably your friend will have completed 2 years of service at the time the final contract comes to an end. Non-renewal of a FTC is a dismissal, and if they have indeed completed two years (including any statutory notice period), the employer will need to show that the dismissal is 'fair'. The scenario you are painting might not fall into that category. See https://www.gov.uk/fixed-term-contracts/renewing-or-ending-a-fixedterm-contract

DoctorStrange

The dates will be just short of two two years i.e. the last one is 1 July to Dec 30, so in total it'll be something like 4 Jan to June 30, July 1 to Dec 31, 3 Jan to June 30 then 1 July to Dec 30.

My understanding is that the contract ends automatically and there's no notice period required unless ending early.

I suppose the definition of "2 years service" might come into play? In this scenario, they'll have "completed" 2 years service but as I understand it they don't gain rights until "after" 2 years service? i.e are the rights allocated on Dec 30 or Jan 4th?